Health Savings Accounts: More Time, Less Money

The effort involved in opting for HSAs over traditional insurance keeps most employees from choosing them, but those who do can really save

By Lauren Young

When Tom Billet tore his Achilles tendon one weekend last August, he knew better than to go to the local emergency room in Westchester County, N.Y., where the cost of an X-ray and examination would run about $850. Instead, Billet went to a nearby urgent care center to have his injury looked at. Total savings? $360.

In many circles, Billet, 50, would be identified as an "educated health-care consumer." Indeed, Billet actually has a leg up on most Americans since he works in the field as a senior benefits consultant at Watson Wyatt (WW). Even so, like many folks, he is worried about steep health-care costs, especially in retirement. That's why Billet is trying to sock away as much money as possible—to the tune of $5,950 next year—in his family's health savings account, or HSA, to build a kind of health-care slush fund.

HSAs are high-deductible insurance plans that allow employees to make contributions to a savings account with pretax dollars. Employers may or may not match employee contributions. Any unused cash belongs to the employee. These high-deductible plans are different than health reimbursement accounts, or HRAs, which are funded by employers and which return any unused cash to the company. And an HSA should not be confused with a Flexible Spending Account, or FSA, which lets you save pretax money for health-care services.

In the Political Spotlight

HSAs have been getting a lot of attention lately, thanks to the 2008 Presidential election. Republican candidate John McCain has made HSAs a cornerstone of his health-care proposals.

Yet while HSAs have been available since 2004, the trend of "consumer-driven health care" has not gained much traction with the American public. That's because most people are confused about how HSAs work. Even Billet, a so-called expert, had trouble understanding how his benefits were administered when he first signed up for his HSA a few years ago.

In addition, plenty of folks simply don't want to be their own health-care manager. After all, there's little of the positive reinforcement that you get (or used to get) from managing your retirement account and a lot more paperwork and negotiation involved. The high deductibles, meanwhile, scare off lower-paid workers. And the cost savings just aren't clear enough to lure employees whose employers still give them a choice between HSAs and a more traditional health insurance plan. Finally, for some workers—especially older ones or those with preexisting medical conditions—the security of a managed-care or traditional indemnity plan may trump any potential savings.

But companies like HSAs because they help shift costs to employees, which is why more than half of large-company plans (companies with more than 5,000 employees) will offer an HSA as an insurance option this benefits enrollment season. However, only 10% to 20% of employees sign up, Billet says. Usage is higher at smaller companies, where an HSA might be the only health insurance option.

Are you considering an HSA? Or are you wondering how you can make the most of your plan? Here's a look at HSAs—the good, the bad, and the ugly.

The Good

Although the deductible is high—averaging $1,500 for individuals and $3,000 for families—HSAs don't skimp on coverage. Plans pay 100% of all medical expenses once the deductible has been reached as well as preventive-care costs. There are no co-payments.

HSAs can be a smart savings tool, particularly for small businesses and self-employed workers who need tax shelters and lower out-of-pocket expenses. That's why Vijay Goel, 31, of Los Angeles opened up an HSA to cut his health-care costs for his startup, HealthShoppr.com, which helps consumers shop for health-care services online.